Laws taxing on S.C. manufacturers, experts say

By Liz Segrist
lsegrist@scbiznews.com
Published Oct. 9, 2012

Businesses have bypassed South Carolina because property taxes are high.

The Palmetto State has one of the highest property taxes on manufacturers in the country, a hindrance for business-recruitment efforts.

Changes to the property tax code are part of an ongoing conversation of tax reform in South Carolina, a conversation that has lasted several years without a solution. Last year, a Republican House Caucus formed a tax reform study committee, chaired by Rep. Tommy Stringer, and recommended a revamp of sales, income and property taxes.

From the committee’s overarching tax reform ideas, a bill emerged proposing a decrease of the property tax assessment ratio on manufacturers from 10.5% to 6%.

“It never went anywhere,” Stringer said, noting that the committee plans to meet sometime this month to decide what tax reform bills will be introduced this year and whether the assessment ratio bill will be included.

Approximately two-thirds of county-levied property taxes are used for support of public education, according to the state Department of Revenue. Municipalities also levy a tax on property for services provided by the municipality.

The property tax structure has been an issue since it was written into the state’s constitution, therefore requiring a constitutional amendment to change it, said Burnie Maybank, a two-time former S.C. Department of Revenue director and attorney with the Nexsen Pruet law firm.

Stringer’s committee used a 2010 report from the S.C. Taxation Realignment Commission that Maybank chaired as a guidebook to reforming taxes. According to TRAC, South Carolina has the highest property tax rate for manufacturers in the country. Manufacturers can lower the rate through fee-in-lieu-of-taxes agreements, or FILOTs, with local governments, but not everyone is eligible.

The report proposed lowering the property tax assessment ratio for manufacturers from 10.5% or amending the requirements for fee-in-lieu agreements to allow existing facilities not currently in a fee-in-lieu to enter one. FILOT gives tax breaks for incoming industry that meets certain requirements, such as investing a certain amount or creating a certain amount of jobs.

“I think it would be in the best interest of industry and the whole of South Carolina, particularly when it comes to future economic development and how competitive we’re going to be, if our Legislature would take a look at how the distribution of taxes is hurting businesses in South Carolina,” said Didi Caldwell, a site selection consultant and principal of Global Location Strategies.

Property tax rates can be a determining factor for companies making site selections, said Caldwell, who recently worked with an undisclosed company that chose Alabama over South Carolina for its lower assessment ratio.

But South Carolina is able to remain competitive with FILOT agreements. Companies that invest $2.5 million and up may negotiate this exemption with the county in which it locates.

This up to 30-year incentive, left to the county council’s discretion, lowers the assessment ratio from 10.5% for manufacturers to as low as 6%. The millage may be held lower than if the property were not under a FILOT, according to the S.C. Department of Commerce.

Economic developers and site consultants have had success in attracting numerous major companies to the state, such as Boeing Co. and ZF Transmissions LLC, in part, with FILOTs.

But fee-in-lieu agreements have limitations.

“From an economic development and competitiveness standpoint, while counties have the ability to lower the tax rates for new manufacturing facilities with FILOT, so do other competing states,” according to the TRAC report.

“In addition, older facilities which predated the enactment of fee-in-lieu, many smaller manufacturing facilities, and many expansions are not in, or eligible for, a fee-in-lieu,” the report said.

Existing buildings not currently in a fee-in-lieu can only be brought into one by investing $45 million in improvements on it, which is rare, said Maybank, an attorney who represents companies needing state and local tax and economic development incentives assistance.

After considering 40 locations, including some older buildings in South Carolina, Carolina Prime Pet expanded to Lenoir, N.C. Owner Van Brown said high property taxes were part of the reason South Carolina was bypassed, according to Site Selection Magazine. Van Brown wouldn’t comment for this story.

“Fee-in-lieus answer the challenge by and large for recruiting new industry and expansions. It meets the need. What it doesn’t do is help out the existing industry,” said Lewis Gossett, S.C. Manufacturers Alliance president.

Gossett said the fee-in-lieu puts South Carolina on a level playing field with North Carolina and Georgia by lowering its assessment ratio to 6%, and sometimes as low as 4% for a Boeing-type project. He said only then will the state’s other assets attract a company, such as low utility costs, high quality of life and a skilled workforce.

“We have the highest property tax on manufacturers in the country,” Gossett said. “From an economic development perspective, because we have FILOT, we can be competitive. Take that away and we’re out of the game before it even starts.”

The high assessment ratio could also deter companies that are searching for locations on their own and that don’t understand the benefits or availability of the FILOTs, Caldwell said.

The fee-in-lieu structure, while often successful, takes time for local governments to approve, money for legal fees and an understanding by the company making the investment, Caldwell said. She advocates an abatement of property taxes instead.

“I’d like for us to be able to do a flat out abatement, say abate property tax by 75% for the next 10 years,” Caldwell said as an example.

The assessment ratio in the constitution can’t be easily changed since it requires a constitutional amendment.

“Property taxes in South Carolina are the highest in the nation outside of the fee-in-lieu. Even inside the fee-in-lieu, our taxes are still significantly higher than North Carolina and Georgia,” Maybank said. “South Carolina has advantages over its neighboring states, but for property taxes, those states are significantly more competitive.”

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